Best put together list of the possible reasons of why the system failed to respond and react. Why in the world Economists and Finance gurus removed from the front line of trading failed to warn.
Traditional institutions failed.
IMF
From the center of the international monetary system, the IMF was sent to a peripheral position. Third world countries accumulated more reserves than the IMF budget. Commodities raised, so what need was there for the infamous IMF. They are trying to come back - the trillion dollar lady.
Traditional measures of market volatility should have registered some uptick as the aberrations began multiplying.
There was a reduction of volatility. Given the belief of the great moderation which a belief that the world's economies had entered a period of reduced fluctuations in economic and financial indicators.
VIX is wall street fear index, now covered daily by Melissa Lee's Fast Money - I wondered if it happened after this book was published-. It is the Chicago board options exchange volatility index. Measure of implied volatility based on the weighted average of prices for various options on a diversified basket of stocks.
Sustained moves in the vix carries important information about the extend of the uncertainty in the markets. A decline in vix would be accompanied by an increase in many investors willingness to assume risk.
VIX kept declining in an impressive fashion until the summer 2007. In other words, investors preferred to take more risks at a time of growing and simultaneous inconsistencies in the marketplace.
The same occurred for volatility in the fixed income and foreign exchange markets.
There another more general sign:
A notable increase in correlations among different asset classes in different geographies and different fundamental drivers.
And others.
Inspired by scribbles and notes from:
When markets collide
Even if Greenspan called it a statistical aberration, It had to take an Asperger's person in Michael Burry and a removed statistician working for Paulson to look beyond the indicators followed by the crowd.
Nothing a Carnegie Mellon process wouldn't catch.
